Sector focus: Asia Pacific excluding Japan

FundCalibre has 22 Elite Rated and Radar funds and trusts investing in Asia ex Japan equities – an exciting sector that embraces some of the world’s fastest growing markets and companies.

The attraction for investors is getting exposure to overlooked areas that have the potential to deliver better-than-expected returns. However, such upside potential isn’t risk-free. Governance issues, political risks, and market turbulence can make it a rather volatile ride.

Here we look at the sector’s recent performance and prospects, as well as highlighting some funds that may be worth considering.

What is Asia Pacific ex-Japan?

The IA Asia ex-Japan sector is for funds that invest at least 80 per cent of their assets in Asia Pacific equities and exclude Japanese securities. This means portfolios will embrace stocks in countries such as China, Korea, Singapore, India, Australia, Thailand, and the Philippines.

While clearly a diverse list with many fast-developing sectors and companies, many of them are emerging areas and likely to suffer growing pains. Regulatory changes, political instability and governance issues are among the main challenges for fund managers to tackle in this area of the market.

How UK investors see the sector

IA Asia Pacific excluding Japan is the 12th most popular sector out of 47 among UK investors with £37.4bn in funds under management^.

The performances generated by funds in this sector have varied over the last few years. In the 2018 calendar year, the sector average return was -9.8%^^. It was back in positive territory in 2019, with an average return of 15.8%^^. This then rose to 20% during 2020^^ as the region – particularly China – recovered well from the Covid-19 pandemic.

However, last year wasn’t so successful with a raft of unsettling regulatory issues adversely affecting China, along with ongoing global supply chain problems. This meant average returns for the IA Asia Pacific excluding Japan sector came in at a relatively modest 1.5% for the 2021 calendar year^^.

Current views on Asia

Anthony Srom, manager of Fidelity Asia Pacific Opportunities, believes caution and selectivity will be crucial factors over the coming months. While he acknowledged the market was relatively expensive with a high degree of risk, he remains confident of being able to make money.

“The primary way to generate performance is through careful stock picking and there are opportunities,” he said. “Select China A-shares continue to offer good risk/reward and large sentiment swings can present mis-priced opportunities.”

The possible devaluation of the Renminbi could be one of the surprises of the year. “It’s something the market is not focused on and over the short-term, would be taken negatively,” he added.

Regulation in China is another hot topic. “The positive news is that regulation is being increasingly factored in by the market and valuations have started to reflect this and, in some cases, over-corrected,” Anthony said.

He highlighted how the fund has used negative sentiment towards the property sector and linked industries to buy Chinese paint company SKSHU Paint. “The stock price was down significantly, but we have taken a view that even if new development of buildings does slow down, the demand for paint remains robust due to renovation and maintenance needs,” he said. “Plus, the industry structure is favourable.”

China is clearly an important part of many funds in this sector – and its economic growth rate is decelerating, according to a recent update from the Guinness Asian Equity Income fund. Co-managers Edmund Harriss and Mark Hammonds pointed out that investor reaction to the country’s macro-economic management story varied between deep gloom and euphoria.

“At present, the view is one of gloom, which places China stocks firmly in value territory,” they wrote. “The reality is that while certain sectors and industries are financially weak, the economy is a whole is well capitalised and resourced.”

They added that the banking system was liquid, interest rates were stable, the currency was strong, and the trade balance is approaching the record of over $600bn for the year. If this continues, they suggested, then China has the resources to bring about economic and financial change without toppling the entire edifice. “Our job is to identify those businesses that are flourishing or are at the forefront of that change,” they added.

Sharat Shroff, lead manager of the Matthews Pacific Tiger fund, has the core of the portfolio in businesses capable of delivering durable earnings growth, accompanied by solid cash flow.

“There are many subsectors, such as real estate in India and digital e-commerce in Southeast Asia, which may have long runways for growth,” he said. In addition, the fund continues to look for Chinese businesses that are taking long strides in closing the technology gap with the West and may start to substitute imports. “The opportunity set continues to broaden and widen, and we remain focused on finding uncorrelated and diversified long-term growth in Asian equities,” he added.

Alternatives to Asia Pacific excluding Japan

While the Asia Pacific ex-Japan sector gives you broad, diversified exposure to countries and sectors, there are a number of other ways to invest in this region.

For example, it’s possible to take a more focused approach as there are also sectors looking at specific countries and parts of Asia. There is IA India/India Subcontinent, IA China/Greater China, IA Japan, and even IA Asia Pacific including Japan.

Here are some funds within the IA Asia Pacific ex-Japan sector that may be worth considering:

Schroder Asian Alpha Plus

This fund is managed by Richard Sennitt and Abbas Barkhordar. It has a fairly broad geographical exposure. China takes the largest share currently at 18.5%, followed by 17.7% in Taiwan, 15.5% in South Korea, 14.6% in India, and 12% in Hong Kong*. Some familiar names populate the fund’s top holdings, including Taiwan Semiconductor, Samsung Electronics, Tencent Holdings and Alibaba*.

Invesco Asian

This fund invests in companies whose share prices look undervalued and the search for these companies often leads the fund’s manager, William Lam, to look for new ideas in unloved areas of the market. However, he also has a clear preference for cash-generative businesses with strong balance sheets, as these attributes suggest sustainable business models and conservative management.
The biggest stock positions, meanwhile, are Taiwan Semiconductor, which accounts for 6.6% of assets under management, and Samsung Electronics that weighs in with 5.2%*.

JPM Asia Growth

Managers Joanna Kwok and Mark Davids have a concentrated portfolio of growth-biased companies in this fund. Once again, China has the largest country weighting, with a third of the fund’s assets*. Taiwan is next with 18.5%, followed by India with 14.9%*. Information technology narrowly has the highest sector weighting of 27.4%, just ahead of financials with 27.2%, and consumer discretionary with 16.5%*. The fund’s largest stock holdings, meanwhile, are headed by the 9.9% in Taiwan Semiconductor, 7.9% in Samsung Electronics and 6.7% in Tencent*.

T.Rowe Price Asian Opportunities Equity

This is a high conviction portfolio of 40 to 70 companies that manager Eric Moffett believes can reliably compound earnings and sustain strong cash flow generation over time. In a nutshell, the aim of the portfolio is to buy high quality businesses run by high quality people. As is often the case with Asia Pacific ex-Japan funds, China has the largest percentage in geographical terms at 37.3%, followed by Taiwan, India, and Hong Kong*. Within holdings, Taiwan Semiconductor has the largest stock position of 10.1%, while other names in the top 10 include Hysan Development, AIA Group, and China Overseas Land & Investment*.

^Source: Investment Association, Sector rankings for November 2021
^^Source: FE fundinfo, total returns in sterling, IA Asia Pacific ex Japan sector, calendar years.
*Source: fund factsheet, 30 November 2021